Feds ran a bitcoin-laundering sting for over a year

More than 40 alleged dark-web drug dealers have been arrested as part of a sweeping federal effort described by the Department of Justice as “the first nationwide undercover operation targeting dark net vendors.” The core of the operation was an online money-laundering business seized by agents from Homeland Security Investigations and operated as a sting for over a year. By offering cash for bitcoin, HSI agents were able to identify specific drug dealers, ultimately tracing more than $20 million in drug-linked cryptocurrency transactions.

“For the past year, undercover agents have been providing money-laundering services to these dark net vendors, specifically those involved in narcotics trafficking,” said HSI Special Agent in Charge Angel Melendez, in a press conference earlier today. Melendez led the operation from New York.

The hijacked money-laundering service was offered across a number of different marketplaces, with agents claiming at least some presence on AlphaBay, Dream Market, Wall Street, and others. In the past, law enforcement efforts have focused on taking down marketplaces in full, most notably Silk Road, Silk Road 2.0, and AlphaBay. But Melendez says his office has shifted focus to the individual dealers, who often operate independent of any single site.

“When we take down a dark net marketplace, these criminals will move to other marketplaces,” Melendez said. “So the focus of this operation was really the bad actors, the people utilizing the dark net to sell drugs.”

So far, prosecutions have been launched across 19 states as a result of the operation, seizing more than $3.6 million in cash. The same raids seized large quantities of Schedule IV pharmaceuticals — including 100,000 tramadol pills and over 24 kilograms of Xanax — as is typical of trade on dark net markets. Agents also recovered more than 300 models of liquid synthetic opioids and roughly 100 grams of fentanyl. Further investigations are still ongoing.

The success of the operation reflects the widespread adoption of anti-money-laundering practices among bitcoin wallet providers, which now typically require the same know-your-customer disclosures as a conventional bank. The largest bitcoin exchange to resist those measures, BTC-e, was shut down by an international law enforcement effort in July 2017, leaving drug vendors with few trusted options for converting drug-linked bitcoin wallets into hard cash.

Melendez declined to give specifics on how the department had linked client wallets to drug transactions, saying simply, “there are tools and technologies that law enforcement uses to conduct blockchain analysis.” (Public records show that HSI’s parent agency spent more than $58,000 on Chainalysis tools in the months leading up to the investigation.)

Still, Melendez emphasized that the open nature of the blockchain made it difficult to hide drug money. “The biggest selling point for the blockchain is that it’s transparent. Everybody can see it. And we can see it, too.”